Understanding The Intricacies Of SEP IRA Rules

There are several SEP IRA rules which have been mandated by the United States government. These accounts, known as Simplified Employee Pension Individual Retirement Accounts, are variations of standard Individual Retirement Accounts. Business owners may adopt these accounts in order to provide retirement benefits for themselves and their employees. If this type of account is made available to eligible employees, they must each receive the same benefits.

There are a few eligibility requirements for employees. They must be at least 21 years of age, and have worked for the same company during at least three of the prior five years. In addition, an employee must have been compensated at least 500 dollars during a tax year.

A traditional Individual Retirement Account must be set-up by an employee who wishes to participate in this program. Then, the employer makes Simplified Employee Pension deposits into that account. Since the account is technically an Individual Retirement Account, all deposits are bound by the regulations which govern IRA accounts. These include guidelines for investment and distribution, as well as contributions and deductions, and all documentation procedures.

Contribution levels are very flexible and discretionary. Employers may contribute higher percentages during productive years, and lower percentages during financially-challenging years. Deposits may be held until the fiscal year's end, when annual profits can be accurately calculated.

As opposed to other retirement savings programs, such as the 401K plan, the SEP guidelines do not require employees to make deposits into their own accounts. Rather, 100 percent of all deposits made into employee accounts are contributed by employers.

All contributions made must be proportional to an employee's annual salary. Deposits are restricted to 25 percent of the annual wage, or $49K, whichever is less. As defined by the Internal Revenue Service (IRS), a person's annual income includes overtime and bonuses, as well as regular pay.

Maximum contributions for business owners are calculated differently. This amount is based upon 20 percent of an owner's net self-employment income. All business-related expenses, as well as one-half of the self-employment tax are deducted to reach the net amount.

Contributions to these accounts are not required to be made each year. However, if an employer makes deposits into one employee's account, she or he must also make deposits into the accounts of all other eligible employees. Employer contributions are not considered taxable income, and are not calculated as part of an employee's gross income.

SEPs can be terminated at any time. The IRS does not need to be informed of the termination. However, employers are advised to notify all employees that the program will be discontinued. In addition, the financial institution which manages the plan should be advised of the change, and informed that no more contributions will be deposited.

The rules which govern withdrawals from these accounts parallel those of other retirement savings accounts. Withdrawals are considered taxable income. Any funds withdrawn from the account before the account-holder reaches age 59 and one-half years of age are subject to a 10 percent early-withdrawal penalty.

SEP IRA rules are basic and easy to understand. These accounts are structured to provide employees and employers with valuable benefits. More specific details are available from the official IRS publication 560.